IMF says risks to successful Portugal bailout still high

Visitors are silhouetted against the logo of the International Monetary Fund at the main venue for the IMF and World Bank annual meeting in Tokyo October 10, 2012.

Reuters/Kim Kyung-Hoon

LISBON (Reuters) - The International Monetary Fund said on Thursday Portugal's economic outlook was "sombre" and its public debt condition "very fragile" although Lisbon has met the latest targets in its 78 billion euro bailout.

It also said the political and social consensus behind Portugal's bailout was fraying.

The IMF announced on Wednesday it had approved the disbursement of the next tranche of 657 million euros to Portugal after the seventh review and after Lisbon's lenders eased the country's budget deficit goals.

However, the IMF's staff report on the review published a day later said the "risks to the attainment of the program's core objectives remain high" for debt-laden Portugal which is going through its third year of recession under austerity.

Portuguese faced the sharpest tax hikes in living memory this year as the government seeks revenues to plug the deficit. Unemployment at 18 percent is the highest on record, although less that in some other bailout euro zone countries.

In March, Portugal's creditors in the 'troika' -- the European Union, IMF and European Central Bank -- eased Portugal's budget deficit goals when it became clear that the country's recovery would take longer than expected under the weight of austerity imposed by the bailout.

GDP is now expected to contract for a third consecutive year in 2013, by 2.3 percent, after shrinking 3.2 percent in 2012.

The bailout was also knocked off course in April when Portugal's constitutional court ruled against a government measure to raise revenues.

"The solid social and political consensus that to date has buttressed strong program implementation has weakened significantly. Economic recovery is also proving elusive," it said.

"And with the program bereft of tools to boost competitiveness in the near-term, there is a high risk that adjustment will continue to take place through more demand compression," the IMF added.

The IMF said the "outlook for public debt remains very fragile" due to the higher than expected budget deficit and because of a worse economic outlook.

It said public debt is now expected to peak close to 124 percent of GDP in 2014, two percentage points higher than expected at the time of the sixth review at the end of last year.

Still, the IMF said "all performance criteria and structural benchmarks underpinning the (seventh) review have been met," adding that two thirds of the 10 percentage points of GDP adjustment in the structural primary deficit has taken place.